On July 25, 2024, a nine-judge bench of the Hon’ble Supreme Court (‘SC’), headed by Chief Justice D.Y. Chandrachud, in the case of Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr^[1]. (‘Mineral Area Case’), held in a majority judgement of 8:1, that royalty is not a tax. The SC held that the liability to pay royalty, even though imposed by the Mines and Minerals (Development and Regulation) Act, 1957 (‘MMDR Act’), arises out of contractual conditions of the mining lease and, thus, the power of the State Legislatures to impose tax on mineral rights and mineral bearing land is not limited by the royalty imposed by laws of the Parliament.

This judgment overruled the decision of the SC in the case of India Cement Ltd. v. State of Tamil Nadu (1990)^[2] (seven judge bench) (‘India Cement Case’) wherein it was held that royalty is tax, and the State Legislatures lacked competence to levy taxes on mineral rights because the subject matter is covered under the MMDR Act. Notably, the SC, in 2004, in the case of State of West Bengal v. Kesoram Industries Ltd (2004)^[3] (five judge bench) (‘Kesoram Case’), held that the decision in India Cement Case (supra) stemmed from an inadvertent error and clarified that royalty is not a tax.

Subsequent to the Kesoram Case ruling, several State Legislatures, such as that of Rajasthan, Uttar Pradesh and Bihar, started exercising their legislative powers to impose levies on mineral bearing land. However, these levies faced constitutional challenge before the High Courts of the respective States, in light of the law laid down in the India Cement Case. This issue finally came before a three-judge bench of the SC, which was subsequently referred to the nine-judge bench for its consideration of validity of the Court’s ruling in India Cement Case.

The substantive issue before the SC was ascertaining the ambit of Constitutional powers of the State Legislatures to impose taxes on mineral rights in contrast to the Constitutional powers of the Parliament. On one hand, the Parliament has the power to legislate on the subject matter ‘regulation of mines and mineral development’ and the Parliament, exercising this power, has enacted the MMDR Act, which provides for charging of royalty on the holder of mining lease in respect of any mineral removed or consumed from the lease area. On the other hand, States also have the power to legislate on the subject matter ‘taxes on land and building’ as well as ‘taxes on mineral rights subject to any limitations imposed by the Parliament by law relating to mineral development’. Now, the issue arose as to whether the imposition of royalty under MMDR Act is a tax in itself, which places a limitation on the power of State Legislature to levy tax on mineral rights.

In this regard, the SC held that royalty is not a tax, inter alia, as: (i) the lessor charges royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign; (ii) royalty is paid in consideration of doing a particular action, that is, extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; and (iii) royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.

The SC also held that there is no direct connection between the taxing powers of the States in relation to mineral rights and regulatory powers of the Parliament in relation to mines and minerals.

Further, the SC also elucidated upon the aspect of taxes on lands and buildings. It ruled that the word ‘land’ includes ‘land of every description’ and also contemplates land as a unit, irrespective of the use to which it is put. This allows the States to levy tax on mineral bearing lands. Hence, if land includes everything below and above the surface, constitutionally speaking, even sub-soil minerals form part of the land, which essentially encapsulates the difference between States’ power to impose ‘taxes on land and building’ vis-à-vis ‘taxes on mineral rights’. The former has to do with taxation of land whereas the latter has to do with taxation of mineral rights.

As a result of Mineral Area Case, the issue arose as regards huge liability which would need to be borne by various mines and minerals based industries (as per some estimates available in public domain, the total liability will approximately be INR 1,50,000 Crore (⁓ US$18 billion)). In view of this, the SC, through its Order dated August 14, 2024^[4], directed as follows:

i.    While the States may levy or renew demands of tax, if any, pertaining to ‘taxes on land and building’ and ‘taxes on mineral rights’, such demands can only be in respect of transactions made from and after April 1, 2005;

Note: The aforesaid Order does not clarify as to which ‘transactions’ have been alluded to. In our view, if the tax in question is levied in terms of quantity of minerals removed from mine, then the levy of such tax could be only in respect of such quantities of minerals which are removed from the mine from and after April 1,2005. This would mean that all tax demands for the period prior to April 1, 2005, would not be enforceable.

ii.   The payment of the tax demanded pursuant to above will be staggered over a period of 12 (twelve) years commencing from April 1, 2026; and

iii.  No interest or penalty can be levied by the States on the non-payment of tax for the period prior to July 25, 2024 (i.e., the date of judgement in Mineral Area Case).

While the above Order of the SC would provide some reprieve to the mines and minerals industry, there is a larger concern of inflationary impact of the above ruling. Also, there is now a real possibility of various States imposing taxes on mineral rights at different rates, which may have a bearing on the comparative competitiveness of various mines and mineral based industries.

[1] Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr., 2024 SCC OnLine SC 1796.

[2] India Cement Ltd. v. State of Tamil Nadu, (1990) 1 SCC 12.

[3] State of West Bengal v. Kesoram Industries Ltd, (2004) 10 SCC 201.

[4] Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr., 2024 SCC OnLine SC 1974.